Tick | September 2022
What The Tick
Day traders are turning to futures markets in growing numbers.
The market is open throughout the day, and futures contracts can be bought and sold in a matter of minutes. More than 2.5 times as many traders are now using their own money to make high-stakes bets on the direction of such financial instruments as oil, corn, and other commodities, according to US Commodity Futures Trading Commission data and figures from the Chicago Mercantile Exchange. The increased presence of day traders has added volatility to futures markets that were once considered staid and predictable, presenting challenges for regulators overseeing what's become a fast-moving casino.
A whole new generation is waking up.
The entry barrier is lowered drastically compared to day trading stocks, which require an account balance of $25,000 versus a small deposit of $400 in a platform such as Ninja Trader, which is enough to buy multiple contracts on the micros.
The Micro's are designed for smaller traders willing to take on more risk than complete contracts but do much less than the E-Minis. They are miniature versions of the Standard & Poor's 500 futures contract based on the widely followed S & P's 500 Index.
The tides are changing!
Paired with the low entry barrier and the market being accessible nearly 24 hours a day, some very profitable traders have created.
The basics are similar to day trading stocks, and only you would be buying and selling futures contracts instead of shares in companies. But, again, you can make money or lose it all on one trade, or you can be more conservative and try to slowly build up your wealth over time by making many trades that fit your trading plan.
A Little History
People on the New York Stock Exchange floor used to buy and sell shares in person before electronic trading became widespread. In contrast to today, when stock prices can vary by as little as a few cents, back then, stock prices would move by 1/8th and 1/16th shares of a dollar–$0.125 and $0.0625 per share – each time they changed hands.
As a result, it was costly to trade a large sum of a stock at a time. Because of the high cost of each transaction and the inability to resell shares quickly, traders needed to make as many trades as possible to make enough money from commissions. The more shares you bought or sold at once, the lower your commission cost per share traded.
Tick Size and Its Value
The tick size is the difference between two price points, whether a slight price fluctuation or a gap between a bid and offer price. Tick sizes vary significantly across futures contracts in the futures markets, which is still significant. While it isn't as influential in the equity markets these days, it still has an essential role in the futures markets due to the significant differences in tick sizes between various contracts. On the other side of the coin, a futures contract's tick value refers to how much money is lost or gained per contract during each tick movement.
In this manner, future traders may rapidly expand their number of contracts with the tick value for that commodity to see how much money they would make or lose for each tick movement. It's simple to calculate that if a contract has a tick value of $12.5 if a trader buys ten contracts, the trader can profit or lose $125 per tick movement. If the underlying instrument varies on average by 100 ticks every day, the trader might lose or gain up to $12,500 each day.
It's also essential to remember this because doing so may cause a trader to take positions that are too large and outside their risk zone. Even when compared to other futures contracts, knowing how many ticks a certain futures market changes every day is essential. The tick values of E-Mini S&P 500 and crude oil futures are nearly identical. However, the latter has almost twice as much daily tick volatility, implying potential losses if a trader isn't attentive, or lack price action fundamentals.
Choosing Your Market
Picking your market is not only about the tick movement or interest rates. It would help if you also considered other market factors such as Liquidity, average trade size, open interest, and fluctuations in the past year. For example, you might see a futures contract with high daily volatility and think it is a safe or better choice. However, this is not always true: High volatility doesn't necessarily mean low risk.
For example, E-mini S&P 500 Futures move an average of 8 ticks per move but have $2 million of open interest at any given time (or $16 billion annually), which means traders are constantly closing their positions too. This creates something known as 'liquidity.' Liquidity reduces your risk because there's always someone to fulfill the opposite side.
In precious metals futures, gold is frequently sold per pound or ounce. Lean Hogs (LH), Pork Bellies (PB), and Corn are the most liquid livestock commodities. Conversely, coffee (C), Live Cattle, High-Grade Copper, and Corn are the least liquid futures. That being said, when it comes to futures markets, there's no such thing as a "bad" one. But some have greater Liquidity than others, which is why traders should keep important factors like tick-size preferences or contract types that affect how much money can be made from each position.
In conclusion, commodities traders can make money in almost any futures market as long as they manage their risk properly. By understanding the tick sizes and values for these markets, traders can develop a plan to take advantage of opportunities while limiting their exposure to downside risk. If you are looking for more information on trading commodities or would like a comprehensive guide to trading futures, our Ascension and Premier course will provide you with all the tools you need.
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RISK DISCLOSURE:
Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures, stocks or options on the same. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this website. The past performance of any trading system or methodology is not necessarily indicative of future results.
CFTC RULE 4.41 - Hypothetical or simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown. No representation is being made that any account will, or is likely to achieve profits or losses similar to those discussed within this site, support and texts. Our course(s), products and services should be used as learning aids only and should not be used to invest real money. If you decide to invest real money, all trading decisions should be your own.
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Testimonials appearing on this website may not be representative of other clients or customers and are not a guarantee of future performance or success.
HYPOTHETICAL PERFORMANCE DISCLOSURE:
Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses is material points, which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program, which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect trading results. Testimonials appearing on this website may not be representative of other clients or customers and is not a guarantee of future performance or success.
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